Neo-Liberalism: From Laissez-Faire to the Interventionist State

One of the most accusatory and negative words currently in use in various politically “progressive” circles is that of “Neo-Liberalism.” To be called a “Neo-Liberal” is to stand condemned of being against “the poor,” an apologist for the “the rich” and a proponent of economic policies leading to greater income inequality.

The term is also used to condemn all those who consider the market economy to be the central institution of human society, at the expense of senses of “community” and shared caring and concern beyond supply and demand. A Neo-Liberal is one who reduces everything to market-based dollars and sense, and disregards the “humane” side of mankind, say the critics of Neo-Liberalism.

The opponents of Neo-Liberalism, so defined, claim that its proponents are rabid, “extremist” advocates of laissez-faire, that is, a market economy unrestrained and unrestricted by government regulations, controls or redistributive fiscal policies. It represents and calls for the worst features of the “bad old days” before socialism and the interventionist-welfare state, each in their respective “radical” or “moderate” ways, attempted to abolish or rein in unbridled, “anti-social” capitalism.

The Birth of Neo-Liberalism: Walter Lippmann and a Paris Conference

The historical fact is that these descriptions have little or nothing to do with the origin of Neo-Liberalism, or what it meant to those who formulated it and its policy agenda. It all dates from about eighty years ago, with the publication in 1937 of a book by the American journalist and author, Walter Lippmann (1889-1974), entitled, An Inquiry into the Principles of the Good Society, and an international conference held in Paris, France in August of 1938 organized by the French philosopher and classical liberal economist, Louis Rougier, centered around the themes in Lippmann’s book. A transcript of the conference proceedings was published later in 1938 (in French) under the title, Colloquium Walter Lippmann.

During his lifetime, Walter Lippmann was one of the most famous American newspaper columnists and authors on the social order, democracy, the free society, and the role of government at home and in international affairs. Over his lifetime, his views on government and public policy were all over the political map, from pro-socialist, to “individualist” critic of Franklin Roosevelt’s New Deal, to then back again after World War II to a strong advocate of “activist” government, both domestically and globally.

But in 1937, his book on The Good Society was a forceful and lucid declaration of the dangers to a free society from the totalitarian collectivist systems – Soviet communism, Italian fascism and German Nazism – that were enveloping Europe in the 1930s. In addition, he warned of the complementary danger from “creeping collectivism” in the form of the regulatory and interventionist policies then growing in the Western democracies, including in the United States under the New Deal.

Walter Lippmann’s Damning Criticism of the Collectivist State

Lippmann’s critique of political and economic collectivism, which makes up the first half of the nearly 400-page book, is still worth reading today by any friend of freedom. He eloquently explains how totalitarian collectivism is a counter-revolutionary revolt against centuries of efforts by humanity to throw off tyranny and poverty, and the ideological superstitions that rationalized rule by the few over the many. Whether in its fascist or communist variations, collectivism is a return to justifications for denying the uniqueness and dignity and liberty of the individual, as well as the abolition of the institutions of a free society that are meant to protect the ordinary human being from domination and control by the State.

As part of his critique of the centrally planned society that inescapably accompanies the Total State, Lippmann heavily drew upon the writings of the Austrian economists, Ludwig von Mises and Friedrich A. Hayek, on the unworkability of a fully planned economy. Also, in ways that anticipated Hayek’s later writings on the decentralized use of knowledge in a competitive market economy, Walter Lippmann explained how dispersed knowledge is conveyed and used by multitudes of people around the world, so the wants of all of us as consumers may be more fully satisfied. And how all of this is made possible through the price system of the market.

He is no less scathing against the danger from the piecemeal forms of planning that pervade modern democratic societies through regulatory restrictions, trade protections and production subsidies that artificially create monopolies, privileged industries and favored individuals. Government intervention corrupts and strangles the functioning of the market mechanism of a free society. To the extent that it does, power and decision-making is transferred from consumers and market-based entrepreneurs guided by the wants of the demanding public to politicians, bureaucrats and the special interest groups that all work together against the “good society” of free and prosperous people.

Walter Lippmann’s Rejection of Laissez-faire

But when Lippmann turns in the second half of the book to “The Reconstruction of Liberalism,” he clearly and loudly makes clear that he does not believe that any return to a laissez-faire market economy or that a highly limited government involvement in society is either possible or desirable. He says the reforms that he wishes to propose are meant to secure a free society from abuse and misuse by those in political power and special interests wishing to use government for their own personal purposes at other’s expense. And much of what he says here about restraints, transparency, and the consist preservation of the rule of law in democratic society to assure personal and civil liberties are often reasonable in a debate over the nature and role of government in human society.

But he argues that the classical economists and the classical liberals of the nineteenth and early twentieth centuries operated with a false and stylized conception of a mechanical “economic man” in a “perfectly” competitive market that does not match how the real world works. If “liberalism” is to be renewed and restored as a viable system acceptable to most in society, government must be more controlling and supervisory over corporations and their workings, since these forms of “big business” are dangerous to freedom. In other words, he questions the acceptance of limited liability companies and thinks that anti-trust laws need to be far better enforced.

“Power” is unjustly and unfairly distributed in an unregulated market economy, leading to abuses against consumers and employed workers by unbridled private enterprise. Government must regulate the size of businesses and how they use their decision-making power must be overseen by agencies of government. Taxes must be established and imposed to assure a more equitable distribution of wealth among the members of society. And the taxes collected more heavily on “the rich” must be spent on “public health, education, conservation, public works, [social] insurance” and other welfarist projects and programs.

In other words, the reformed and “new” liberalism that Walter Lippmann proposes as the alternative to the totalitarian collectivisms threatening to extinguish freedom and democracy around the world is: the interventionist-welfare state that simply recognizes and places much greater importance on the effectiveness of market competition to “deliver the goods” and supply important forms of personal liberty and choice than the more collectivist critics of capitalism.

The Colloquium Walter Lippmann in Paris in 1938

This agenda became, as I said, the basis for that 1938 conference in Paris devoted to Walter Lippmann’s book. Among the participants at the conference were Raymond Aron, Louis Baudin, F. A. Hayek, Michael Heilperin, Etienne Mantoux, Ludwig von Mises, Michael Polanyi, Wilhelm Röpke, Jacque Rueff, Alexander Rüstow, and Alfred Schutz. In all, there were more than twenty-five attendees.

In his opening introductory remarks to the conference, Louis Rougier was clearly and deeply impressed and influenced by Lippmann’s arguments on a reformed new liberalism. He stated that the issue now facing “liberals” was not whether there should be government intervention in the market economy but what type of such interventions.

He referred to those interventions that were “conformable” with the market economy, and those that were not. A laissez-faire world was a thing of the past, It was necessary to “accept the world as it is,” especially because economic policy had to be consistent with “the social demands of the masses.” Thus, a “new” liberalism must recognize State involvement with “the regulation of property, of contracts, of patents, of the family, the status of professional organizations and commercial corporations,” and a variety of other active intrusions into the market system.

Following Walter Lippmann’s own opening remarks, in which he restated the major theses of his book, the discussion turned to what should be the name of this alternative to totalitarian collectivism? Back and forth several of the participants went about whether what they were talking about was still consistent with the “old liberalism,” or was it something different. Was it still consistent with the traditional understanding of “individualism”? Had not “liberalism” always stood for the widest liberty for the individual and a government strictly limited to protect that liberty? Was what was offered in Lippmann’s book and what was to be the subject matter of the conference a “new” Liberalism”?

Later, near the end of the conference, French economist, Jacque Rueff, suggested, “Left Liberalism.” This did not sit well with many of the other participants. So, instead, other possibilities were offered: “positive liberalism,” or “social liberalism,” or “Neo-Liberalism.”

Ludwig von Mises on Monopoly and Cartels

The clash between the proponents of traditional, or laissez-fare, or “classical” liberalism and this emerging Neo-Liberalism soon showed itself in the conference sessions that followed. Austrian economist, Ludwig von Mises, argued that regulation of business to limit “bigness” was neither necessary nor desirable. He reminded the other attendees that monopolies and cartels among private enterprises invariably were historically due to the interventions of the State to protect privileged companies from market competition. And, indeed, governments had often had to use their compulsory powers to force private enterprises into politically created cartels that were not wanted or desired by many of the market competitors. Said Mises:

In many cases even this State intervention has not been enough by itself to being about the creation of cartels. The State has had to force the producers to group themselves into cartels by means of special laws . . . So it is impossible to maintain the thesis according to which the coming of cartels was the natural result of the action of economic forces. It is not the free play of these forces that has given rise to cartels but rather the intervention of the State. So it is a logical error to try to justify State intervention in the economy by the necessity of preventing the formation of cartels because it is precisely the State which has led to the creation of cartels by its intervention.

Similarly, Mises insisted any problems with anti-competitive monopolies in the market were not the result of normal market forces, but the interventions of the State, as well. “It is not the free play of economic forces but the anti-liberal policy of governments that has created conditions favorable to the establishment of monopolies,” Mises said. “It is legislation, it is politics that have created the tendency toward monopoly.”

Along related lines Mises also argued that it would be economically harmful for government to restrain the formation of limited liability corporations. They serve as a market means of combining large sums of investable funds that enable projects to be undertaken that serve market demands, that otherwise might very well be impossible.

Mises was met by other conference participants who, counter-wise, insisted that the market tended toward forms of unhealthy and undesirable concentrations of industry and economic power and influence, which only the State could contain, control and limit. Regulation of business had to be part of the new Neo-Liberal agenda. The famous German economist and sociologist, Alexander Rüstow, who was one of the intellectual influences on post-World War II German economic policy, went so far as to say that the problem was due to the State being too “weak” to prevent these corporate tendencies toward industrial concentration.

Social Safety Nets and the Role of the State

In another session, the issue was social welfare and the interventionist state. And here, again, the debate concerned the extent to which a free market economy could “satisfy” the demands of “the masses” for “social security.” In general, there was no principled resistance to certain minimal social “safety nets” on the part of the participants who addressed the issue in this part of the conference. Instead, the discussion surrounded the “limits” of the welfare state. How was it to be financed? What dangers could arise due to deficit spending to cover government redistributive spending? What incentives should not exist for people to find it attractive to be permanent wards of the State?

For instance, Austrian economist, Friedrich A. Hayek, argued that the social insurance benefits should not be equal to or greater than what an unemployed or displaced worker would receive if he were employed. Otherwise, he’d have not the incentive to relocate and find market-based gainful employment. And Jacque Rueff highlighted a theme he had already emphasized in the 1920s, a clear relationship between the generosity of unemployment insurance payments and the amount and length of general unemployment as experienced in a number of countries in the 1920s and during the Great Depression.

But the older classical liberal presumption that it should not be the duty of the State to subsidize or financially support those who found themselves temporarily unemployed was never discussed. The case that this is one of the tasks of the voluntary associations of civil society was never brought up.

However, Mises reminded the others that, “Unemployment, as a mass and lasting phenomenon, is the consequence of a policy [by governments and labor unions] that aims at maintaining salaries at a higher level that would result from the state of the [free] market.” In this Mises was seconded by a number of the other participants.

Spontaneous Social Order vs. State Direction of Society

A clear difference between the traditional classical liberals and these Neo-Liberals was whether society, in general, should be the product of the spontaneous interactions of the social and market participants, themselves, or might the unregulated patterns of social evolution take on forms requiring government intervention and “correction”?

In a session devoted to the “Sociological and Psychological, Political and Ideological Causes of the Decline of Liberalism,” Alexander Rüstow set the tone with an insistence that the evolution of markets had created outcomes that needed governmental correction and guidance. He argued that the task of government policy was not to assure the greatest material income, but “a living situation that was as satisfying as possible.”

Men need liberty, most certainly, Rüstow emphasized, but they also need “unity,” a sense of social “belonging,” similar to the family. Society needed to provide this in some way, and as far as he was concerned, this could not be left only to the free associations of the marketplace. The State had to devise ways of giving and providing people with this shared sense of collective belonging while also maintaining the freedom that people also clearly desired. This required social planning of various types along side the market economy, including urban and rural zoning and planning for a more balanced and harmonious life. Either a new, reformed and interventionist liberalism could offer the missed sense of collective belonging, Rüstow claimed, or fascism and Nazism would fill the void in men’s psychological being.

Ludwig von Mises countered Rüstow’s argument. Rüstow’s implicit presumption that the peasants of yester-years before the dawn of capitalism were happier than modern industrial workers in urban areas with all their available material and cultural amenities was highly dubious. Mises suggested that Rüstow had fallen into the misplaced “romantic” fantasies of those anti-market conservatives who conjured up images of an idyllic countryside of contented “commoners” and kind and gentle noblemen before commercialism undermined human bliss. “It is an undeniable fact,” Mises said, “that in the last hundred years millions of men have abandoned agricultural occupations for industrial work, which certainly cannot be considered a proof of the greater satisfaction that agricultural activity would have given them.”

For all the talk about group identity and unity in the totalitarian states, Mises went on, the fact is that the collectivist regimes in the Soviet Union, fascist Italy and Nazi Germany had all promised materially better circumstances and economic opportunities through planning and control to those over whom they ruled. Individuals do often suffer from psychological dissatisfactions with liberal society, but the task was to make it plain to people that liberty and market-based prosperity offer the greatest opportunities for each to find their own best answers to these wider needs and desires for human association.

Neo-Liberalism Concessions to the Collectivist Spirit of the Times

What, then, was the upshot of the conference? And what does it tell us about the meaning of Neo-Liberalism? Many of the classical liberals during the period between the two World Wars were despondent and despairing about the seeming twilight of the free society. Totalitarian variations on the collectivist theme were on the ascendency in Europe.

When the Walter Lippmann conference occurred in August 1938, Hitler had already annexed Austria in March of that year, and the crisis had begun that led to the Munich Conference in September that resulted in the dismembering of Czechoslovakia under the threat of Hitler invading that country. The fear of war was everywhere; this came with the accompanying concern that war would bring a final end to the last residues of the liberal epoch that had existed before the First World War. And, indeed, an entire session at the conference was devoted to this concern and how to respond to it.

Virtually all the conference participants were strongly market-oriented liberals who considered competitive capitalism essential to freedom and prosperity, and that all forms of socialist planning to be economically unworkable and threats to personal and civil liberty.

But except for a few of the participants such as Ludwig von Mises, all the attendees concluded that to “save” political and economic liberalism from total destruction, a “Neo-liberalism” had to be formulated, developed and offered to a world apparently mesmerized by the promises of Soviet communism and Italian and German fascism.

Either out of actual reflective conviction on the nature of the market or political expediency in the face of a general rejection of laissez-faire liberalism in Western society, many of those who commented, debated and argued during the three days of the conference concluded that to counteract the collectivist trends and preserve the essential institutions and working of a relatively free market system, it had to be combined with aspects of the interventionist-welfare state that would make it palatable to “the masses.”

Neo-Liberalism was not born as an attempt to rationalize and restore a laissez-faire unbridled capitalism, but as an idea to introduce a wide network of regulatory and redistributive programs that would enable the political salvaging of some of the essential elements of a competitive market order. The tricky task, in the eyes of most of the attendees, was to figure out how to do this without the interventionist system itself threatening to get out of control and degenerate into that type of piecemeal system of collectivist privilege, plunder and corruption that Walter Lippmann had, himself, said easily can be an incremental backdoor to a planned society.

Neo-Liberalism and the Rise of the Interventionist-Welfare State

In retrospect, the Neo-Liberalism agenda that was emerging out of the Colloquium Walter Lippmann was an attempt to square the hole: the combining of individual freedom and free market competitive association with political paternalism and governmental commands and controls over how people may interact and the outcomes to be allowed from their interactions.

By doing so, those sincere friends of freedom and the market order ended up conceding all the basic premises of their collectivist rivals: the market, when left alone, tends toward unhealthy corporate concentration with worker and consumer exploitation, thus requiring regulation of business size and practice; the market could not be trusted to assure stability, security or welfare, and hence “activist” government had to provide these things, within, hopefully, fiscally sound boundaries, of course; the free market is not enough for man and the human condition, so government has to regulate, guide and restrain social development to create “unity” and community beyond supply and demand.

Neo-Liberalism was born not as an “extremist” attempt to rationalize and implement unrestrained capitalism and an inhumane social system. It was conceived as creating a more humane and just society precisely by rejecting laissez-faire liberalism and its accompanying reliance upon the free associations of civil society to mitigate the uncertainties and problems of everyday life. And it was meant to be a system that would be acceptable and accepted by “the masses” in democratic society.

It is certainly true that the much of the Neo-Liberal agenda that was successfully implemented in a variety of post-World War II countries, such as West Germany, brought about an “economic miracle” of recovery from the war’s destruction by unleashing market forces and the entrepreneurial spirit. (See my article on, “The German Economic Miracle and the ‘Social Market Economy’”[5].)

However, the triumph of the interventionist-welfare state, beginning in the immediate post-World War II era and up to the present, therefore, is also partly due to the Neo-Liberal friends of freedom who offered their own justifications for many of the same policies that their opponents on “the left” also espoused. Only they hoped to keep them within more “manageable limits” so a vibrant market economy might still effectively function.

The modern day “progressives,” therefore, are rejecting and condemning just another variation of themselves that has wanted far more reliance on competitive markets and less regulation and redistribution than for which they have any desire; and all within the context of those “progressives” doing their best to deny any family resemblance.

Neo-Liberalism’s origins, agenda, and consequences all point toward the need for a new agenda for liberty: one that recognizes and restates the idea and ideal of that original and true liberalism of laissez-faire and voluntary civil society.